Prefer Crompton Greaves over Siemens, ABB: Motilal Oswal

Motilal Oswal has come out with its report on capital goods sector. The research firm remains neutral on the T&D sector, with preference for Crompton Greaves over Siemens /ABB.

PWGR's order awards robust; Green Energy corridors to contribute in FY14/FY15: During 1HFY13, PWGR order awards at INR93b are up 133% YoY, and are boosted by the second HVDC order of INR25b. Excluding the same, orders were up 70% YoY. Typically, PWGR orders are back ended and thus H1FY13 orders are the highest since last 4 years. While the PWGR ordering has largely plateaued as a large part of the 12th Plan (FY12-17) projects have been tendered out, we believe that there exist upside possibilities from Green Energy Corridors (investment plan INR400b) and Intrastate transmission projects in FY14/FY15. Overseas players continue to be aggressive, also making initial in-roads in project business: During 1HFY13, Chinese players have virtually dominated 765kv segment, both in product and project awards by PWGR. In transformers, of the INR7b order awards, 75% have been bagged by Chinese players (Hyosung 34%, TBEA 41%). In a first instance, New North East Electric Co, one of the prominent players in GIS substations in China, bagged orders worth INR5b (75% of orders excluding HVDC order) in 765kv substations. FY12 saw the entry of National Contracting Company, Saudi Arabia in JV with Indian companies which bagged INR3b orders (in transmission line towers, market share 3%) and in 1HFY13 has again bagged orders of INR3.5b (market share 12%). Competitive intensity remains at elevated levels, pricing levels stabilizing: Profitability in power products has eroded over last 3-4 years, with EBIT margins declining from peak of 15-19% in FY09 to 6-8% currently due to increased competitive intensity leading to 25-30% fall in transformer prices. With product prices bottoming out and prices of raw material (CRGO electrical steel) easing, margins are showing signs of stabilization. On the back of PWGR ordering, the MVA demand in power transformers is up ~2x from 2008 levels, while distribution transformers continues to be at 2008 levels. We believe that the power products should see improved demand environment, given that several SEBs have raised tariffs over the past 18 months. Debt restructuring proposal will also lead to improved liquidity. Our view: Competitive intensity in the Indian T&D equipment sector remains high. We believe that low product prices would keep margins under pressure at least in the near to medium term. A recovery in profitability is a necessary for earnings acceleration, and hence, valuation re-rating. We remain Neutral on the T&D sector, with preference for Crompton Greaves over Siemens /ABB. Disclaimer: The views and investment tips expressed by investment experts/broking houses/rating agencies on moneycontrol.com are their own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions. To read the full report click on the attachment

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